How Your Insurance Rates Are Calculated

How Your Insurance Rates Are Calculated

Recently I was on the hunt for car insurance. Many people do not understand the factors that impact their insurance rates, and my research brought out some important things to know in the unknown world of insurance premiums.

Health Insurance Rates

Health insurance is a beast of an industry. While I am a big proponent of public healthcare, that is not the world we live in (if you are in the United States). Health insurance rates can be calculated using one of two methods.

If you work for a big company, your employer will negotiate a blanket rate for everyone at the company. This is based on factors such as the average age of employees, fitness levels, and so on. Your employer will generally pay a portion of your premium every month and you pay the rest. Every company is different, and you have little, if any, control over how this is handled.

If you need to find your own health insurance, a formula is used to determine your individual plan rates. The major inputs are your age, weight, family health history, your health history and pre-existing conditions, tobacco and alcohol use, past surgeries, and other major risk factors for health care costs.

Auto Insurance Rates

The auto insurance industry has done extensive research to find correlations between people and driving safety. It turns out that the statistics are pretty solid, and the industry prices insurance based on your risk factors.

The major factors for auto coverage are your age, gender, driving history, marital status, credit score, home zip code, and your car’s make, model, and color. If you are a seventeen year old boy that has had several accidents, lives in a dangerous neighborhood, and drives a cherry red Mustang convertible, your rates are going to be higher than a fifty year old married woman driving a 1980s station wagon. It makes sense.

The down side is that you could be a really safe seventeen year old boy and still get hit with high rates because other seventeen year old boys get into lots of accidents.

Renter Insurance Rates

I have renter’s insurance. I highly recommend all renters get a policy to cover your belongings. Landlords have insurance to cover the property, but your stuff is not covered by that policy. If there is a floor or fire and your possessions are destroyed, a renter’s policy pays to replace your stuff.

Renter’s policies are rated based on the location of the property, construction and building style, size of the property, type of property (apartment or single family home), and certain policy exceptions. Discuss this in detail with your insurance agent to make sure your coverage meets your needs.

Homeowner Insurance Rates

Homeowner’s policies cover the building and the contents of the building. The factors are very similar to renter’s policies, but the premiums are higher because you are covering the building and the contents.

Generally homeowner policies are bundled into mortgage payments so you just make one payment per month for your house. Property taxes are often included as well.

If you live in a neighborhood with high crime rates, your insurance is going to be higher than a safe suburb. If you live in a wood frame house, your policy will cost more than a brick or steel constructed building. These risk factors take into account the likelihood of a loss or claim.

Complex, But You Have to Understand It

The insurance world is complex. While your agent might seem like your friend today, the idea of an insurance company is to make a profit. To make a profit, they try to maximize what you pay in and minimize what they pay out.

Make sure you find a trustworthy, highly rated, well regarded insurance company. All insurers are not alike. Some people have horror stories where companies would not pay out for a claim. Others have stories about helpful agents walking them through the entire process. Read a lot about the company when you are making a selection.

Determining Insurance Premiums-

This post was originally published on April 27, 2011 and updated on March 23, 2021.

How Your Insurance Rates Are Calculated

6 thoughts on “How Your Insurance Rates Are Calculated”

  1. There are so many factors involved in insurance. Last year, I found out that if I got the cheapest renters insurance policy from my insurer (it would cost $4/mo), I would qualify for a multi-policy discount which would lower my auto insurance rate by $13/mo. Totally worth it!

  2. Credit scores, which you mention in the article, can’t be highlighted enough. Some companies are calling them your “insurance score” now, but at the end of the day taking control of your personal finances means you’re probably more responsible in other facets of your life.

    1. On Credit Karma you can see your insurance industry calculated risk score. It is interesting to see the different break down.

  3. Hunter @ Financially Consumed

    The auto insurance elements of cost determinition are nothing short of discrimination: age, gander, credit crore, marital status. No doubt there are rheams of statistics to back up the justification for each one, but still….discrimination. Surely they can do better?

Comments are closed.

Scroll to Top